Cable awaits Wednesday breakout.

Today we had broad risk-off sentiment in the currency markets lead by losses in the EURUSD and volatility in STIRs as continued uncertainty around the bailout in Cyprus has sparked another inevitable round of contagion fears for peripheral Europe.

Meanwhile Sterling held its own today and was the out-performer relative to the other majors including the Aussie and a flight to quality in Gold.  For the relentlessly bearish GBPUSD market of late, today's strength was impressive and indicative of a market that had clearly overreached to the downside, the low of which formed on the rejection of worse than expected UK manufacturing data which sellers used as an excuse to take profits.  Since then we have seen a steady retracement back to what I perceive to be fair value as price has steadied in a tight range since the start of the week and traders wait for Wednesday's slew of UK data before taking action as shown below on the 4hr chart.

We can see that despite weakness in other risk currencies, the above pair has been unable to trade down and this technical flag formation is displaying clear signs of strength.  Fundamentally, however, Cable is a massive sell as improving economic conditions across the pond contrast starkly with a struggling UK economy and continued dovishness in the BoE.

I am therefore looking for sell opportunities in the inevitably volatile price action expected tomorrow with both the BoE minutes and the FOMC set to deliver a double wammy to this market.  Running in the background will of course be the Chancellers delivery of the Spring Budget, although this has been traditionally bullish for FTSE and GBP, I think it will clearly be overshadowed by the actions/ or inaction of the Central Banks.

TRADES: The main shock scenario I perceive for this pair would be if another 3 months of QE is agreed by the MPC and it will be interesting to see how aggressively the market sells-off in this scenario. If it can't maintain a sell-off than this is very bullish and I will be looking to get long on any false break of the current trading range. Alternatively, if there is a relief rally off the back of a 6:3 vote then I will be looking for any excuse to fade this move i.e.. any sign of sellers entering the market in the major resistance zone above 1.5275 or, on a lesser scale - a false break of the current trading range that has been in place since Monday would do nicely to trap Bulls. I would look to take profits quickly, however, and not want to hold a position going into the FOMC in the evening.  In terms of the FOMC I am expecting volatility but no game changer.  We all know Bernanke is a dove and although the economy is improvinng, the unemployment figures still have some way to go before withdrawing stimulus.  On the other hand, there may be concern that the stock market is overheating and Bernanke may signal this to the market to take some steam out of this rally.  This would be the shock scenario for me but it is unlikely I will be able to trade Cable off of this, but my mates in fixed income will have a field day!